The secret behind product pricing

September 29, 2021
 by Paul McGowan

13 comments on “The secret behind product pricing”

  1. In a typical company that designs and manufactures products, R & D must be paid for out of the gross margin on goods sold. The gross margin is the difference between the price paid by distributors to buy your products, and the cost to you of manufacturing those products. Customers are indirectly paying the R & D costs, which is part of the original question.

    The R & D costs for any particular product are already known when the product is made available to customers. The selling price is a judgement based on the cost of manufacturing and the number you expect to sell at any particular selling price. Some companies will aim to sell a few pairs at a high price, while others will try to sell a larger quantity at a more affordable price. Of course, unit manufacturing costs could be lower when quantities are higher. It’s not an easy decision. Paul is saying, quite reasonably, that the sunk R & D costs should not be a factor in setting the selling price.

    Most companies will figure out the return on investment (ROI) before starting work on a new product, either using a team of accountants, or on the back of an envelope. If the product is going to cost a fortune to develop, the gross margin will be small, and the sales are likely to be few, then it seems like a poor use of the R & D budget. R & D costs are likely to be much higher when a company goes into a new product area (like speakers).

  2. Well as the project moves along the pricing seems to be coming into focus, as Paul mentions a pricing in the $20-$30k range. Certainly some rather tough competition in that range. Looking forward to a firm release date and price. Was looking forward to a product that hit the original $15k target.

  3. I still fail to see how the cost of developing a product is not borne, in one way or another, by customers. Using accounting terminology can be confusing. It really is a simple matter of income minus expenses determining pricing if you want to make a profit.

    It may be indirect. However, if the only source of revenue for PSA are sales, the company must make enough in Sales to pay for R&D. Sales involves pricing, not just for the particular product developed, but for every other product in the lineup.

    This is not rocket science. PSA does not have a sugar daddy or mommy someplace to support the development of the FR-30. Somebody please explain how as the R&D costs for the FR-30 increased, the need to generate income to pay for it did not come from what we as customers will pay for the FR-30 or pay for others products in the lineup.

    What I also don’t understand is the need to say it is otherwise. I find nothing wrong with paying more to help with a company’s development of new products. I have the choice to pony up if I want to buy a PSA product. Nobody forces me too.

    1. Yes, of course you’re right. In the end, sales of products have to have enough margin in them to cover expenses.

      The whole point was how we do it. For example, after having gone through (now) 4 variations of speaker design and a few years of expenses, were we to do what many companies do—add up all the associated costs, determine how many speakers we’re likely to sell, and divide those costs into the speakers—then add on top of that the cost of actual manufacturing and that determines the retail price (after a markup), the retail price would likely be twice what we’re charging (or more).

      That’s not what we do.

      It’s probably not that important because, as you suggest, in the end our sales have to net us enough revenue to cover costs.

      People had just asked and I thought it important to share with the community how it works.

      We are family.

      1. Sometimes it takes approaching a subject from different angles to understand it. Your further explanation clarified it for me.

        My takeaway is that the FR-30 alone does not bear the total costs of R&D for the speaker, an especially hard thing to do on a multi-year development cycle. The cost is spread among other products. Their price has to increase to balance the books.

        Which is totally reasonable, both from a company and a client perspective. Some customers may not like paying more for a product when they have no plans to acquire an FR-30 or other models that may come later on.

        They can choose supporting PSA, or not. The fact is that anyone who values PSA’s continued evolution needs to understand is that it is how business works. There is no free ride.

  4. Paul, I think you would really a enjoy a book titled ‘The Guernsey Island Literary and Potato Peel Pie Society’ – yes, that’s the title! It’s a novel of the Guernsey Islanders while occupied by the Nazis in World War II. There’s also a film version.

    And FWIW, Guernsey, along with other Channel Islands are located just off the north coast of France.

  5. “Profit Centre” is the term accountants use when bundling up all the costs and markups of a single specific product.

    Paul is not using this approach but instead amortizing costs across a wide product line.

  6. Guernsey, along with other Channel Islands are located just off the north coast of France. The channel islands are not technically part of the UK, rather they are Crown Dependencies. They were previously part of the Duchy of Normandy, and following the Norman invasion of 1066, they became part of Britain.
    Wish you all the best with the speakers Paul when they come on the market they look really super

  7. Paul, I wish the pharmaceutical industry took the same approach on drug pricing. But, then there would not be enough revenue to support tv advertising, congressional lobbyists, legal challenges, peer reviewed studies, or conferences in Hawaii.

  8. You forgot to mention catered food to doctors offices all over the place. My wife worked in a large doctor’s office, and almost everyday there was catered food brought in from some pharmaceutical company.

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